MO Prop A: If it passes, who wins, who loses?

In Missouri the battle over the November ballot initiative, Proposition A, is hot. There is a lot of confusion over what Prop A is and, if passed, what this will mean for Missourians. With talk centered around the struggling economy and the Bush tax cuts in particular, this local issue could set a standard for other cities and states in the way Arizona’s SB 1070 did for states regarding immigration policy.

The Missouri Tax Initiative, or Prop A, would allow Missourians to decide the fate of St. Louis and Kansas City earning taxes and prohibit any new earning taxes throughout Missouri. If passed, Prop A would not immediately repeal the earnings tax. Instead, it would force St. Louis and Kansas City residents to vote every 5 years whether to keep their earnings tax or phase it out. If Prop A passes, the first such vote will be in April of 2011. Of course, if the earnings tax is then voted down, there will be no subsequent votes.

On the face of it, allowing voters a choice sounds like a great idea, and that is exactly what proponents of the measure are emphasizing in their final push before the November elections. However, a yes vote on Prop A is also a prohibition on any new earnings taxes throughout Missouri, even if voters later decide it is in their best interests.

What is the earnings tax (or e-tax) used for and, if Missouri voters choose to phase it out, how will we replace the lost revenue?

Kansas City, Missouri

To fully understand the scope of this measure, we need to know how much St. Louis and Kansas City rely on the e-tax and what services this tax pays for. In St. Louis, the e-tax represents more than one third of the operating budget, and in Kansas City the e-tax makes up nearly half of their operating budget, at 40%.

Earning taxes in both major cities help fund essential services that keep the city safe and livable for everyone; services like law enforcement, road maintenance, the health department, and fire fighting. This tax also helps pay for snow and trash removal, city employee salaries, and after-school programs. Amenities such as parks and recreation and the Kansas City zoo are funded by the e-tax as well. With Missouri cities already making budget cuts, what would such a loss mean for these services?

St. Louis Comptroller, Darlene Green, has called the initiative “disastrous” and said, “Without the earnings tax, it is easy to see that the city of St. Louis would be forced to make drastic cuts in public safety and virtually every other service provided to taxpayers.”

The Kansas City firefighters union has also come out against Proposition A. Captain Sherwood Smith of Local Union 42 stated last Tuesday that no earnings tax “would mean fewer firefighters to protect our citizens, increased response time for EMS units” and that it would “place those who live and work in Kansas City in greater danger.”

Without an earnings tax, these large cities will have to generate revenue in other ways if they hope to continue funding public services. Two suggestions for replacing this revenue involve increasing other taxes: property tax and sales tax. But in order to fully compensate for the elimination of a 1 percent earnings tax, the Missouri Budget Project estimates that both cities would have to increase property taxes by 400%, or city sales tax would need to be tripled in St. Louis and doubled in Kansas City.

If the e-tax is discontinued, essential services face budget cuts or losses, a situation with far-reaching consequences for city residents who depend on them. Without an alternative, city employees could face unemployment at a time when jobless numbers hover over 9 percent nationwide. Darlene Green reinforces that point, saying, “Almost one-third of the city’s general fund budget relies on revenue from the earnings tax. To put that into perspective, the city’s police department is roughly one-third of the city’s general fund budget this year at $129.4 million. The police department’s budget can be directly tied to the city’s earning tax revenue.”

While revenue generated through the e-tax pays for public services that benefit all Missourians, ending the tax would hit city residents especially hard; they would be burdened with increases in sales or property taxes implemented to recover revenue. People already struggling to pay mortgages could find themselves facing a 400% increase in property tax. In addition, commuters and tourists alike would feel the effects of a tripled or doubled sales tax.

After losing a recent court battle to prevent Prop A’s appearance on the November ballot, Kansas City Mayor Mark Funkhouser stated he will “continue to inform Kansas City voters, and voters across the state, how removing our ability to tax earnings will strike a devastating blow to basic services in Kansas City.”

So who exactly benefits from the death of the earnings tax?

Enter Rex Sinquefield, a Missouri billionaire who made his fortune in stock market investments. After spending 9 years at a Chicago bank, he founded the investment firm Dimensional Fund Advisors in 1981 together with

Rex Sinquefield

David Booth. In 2009 Dimensional had more than $160 billion under management. According to campaign finance reports, Sinquefield has contributed over $7 million to support Proposition A. The Show-Me Institute, a public policy research organization founded and headed by Sinquefield, was the first to release reports supporting the elimination of the earnings. Sinquefield has created 100 political action committees in which to funnel his campaign contributions, in order to bypass legal limits on such contributions. Let Voters Decide is one such Sinquefield-created PAC, having spent more than $5 million in support of Prop A as of the end of August, 2010.

A new report from the Institute on Taxation and Economic Policy shows that the poorest Missourians pay 9.6 percent of their income in state and local taxes, and middle-class Missourians pay 9.5 percent, while the richest Missourians (average incomes over $1 million) pay only 6.6 percent of their incomes in Missouri state and local taxes. A dramatic increase in sales or property taxes to replace e-tax revenue is a policy that hurts the people who can least afford it, while granting a nice tax break to the wealthy.

With a multi-million dollar investment in a single piece of legislation, Sinquefield may have something to gain. Whether that interest is merely an investment in his own political and economic ideologies or a giant tax break for him, Sinquefield has failed to make the case for an anti-earnings tax position. Is simply having the “choice” worth the economic damage?

“No one is talking about getting rid of the revenue,” Sinquefield told the St. Louis Post Dispatch in February. “It has to be replaced.” When asked how, he said, “That was the reason that we proposed a 10-year phase-out, so you have a lot of time to figure this out.”

We will have a lot of time to figure out how to solve the problems Proposition A creates.